Regulation D: Reserve Requirements for Depository Institutions, 20448-20454 [2015-08743]

Download as PDF 20448 Proposed Rules Federal Register Vol. 80, No. 73 Thursday, April 16, 2015 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL RESERVE SYSTEM 12 CFR Part 204 [Docket No. R–1513] RIN 7100–AE31 Regulation D: Reserve Requirements for Depository Institutions Board of Governors of the Federal Reserve System. ACTION: Notice of proposed rulemaking; request for public comment. AGENCY: The Board is requesting comment on proposed amendments to Regulation D (Reserve Requirements of Depository Institutions) regarding the payment of interest on certain balances maintained at Federal Reserve Banks by or on behalf of eligible institutions. Specifically, the Board proposes to amend Regulation D to permit interest payments on certain balances to be based on a daily rate rather than on a maintenance period average rate. The proposed amendments should help to enhance the role of such rates of interest in moving the federal funds rate into the target range established by the FOMC, particularly on occasions when changes in those rates do not coincide with the beginning of a maintenance period. DATES: Comments must be received by May 18, 2015. FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Special Counsel (202/452–3565), Legal Division, or Thomas R. Keating, Financial Analyst (202/973–7401), or Jeffrey W. Huther, Senior Economist (202/452–3139), Division of Monetary Affairs; for users of Telecommunications Device for the Deaf (TDD) only, contact 202/263–4869; Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. SUPPLEMENTARY INFORMATION: tkelley on DSK3SPTVN1PROD with PROPOSALS SUMMARY: I. Statutory and Regulatory Background For monetary policy purposes, section 19 of the Federal Reserve Act (‘‘the Act’’) imposes reserve requirements on VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 certain types of deposits and other liabilities of depository institutions. Regulation D, which implements section 19 of the Act, requires that a depository institution meet reserve requirements by holding cash in its vault, or if vault cash is insufficient, in the form of a balance in an account at a Federal Reserve Bank (‘‘Reserve Bank’’).1 Section 19 also provides that balances maintained by or on behalf of certain institutions in an account at a Reserve Bank may receive earnings to be paid by the Reserve Bank at least once each quarter, at a rate or rates not to exceed the general level of short-term interest rates. Institutions that are eligible to receive earnings on their balances held at Reserve Banks (‘‘eligible institutions’’) include the institutions described in section 19(b)(1)(A) of the Act 2 and any trust company, corporation organized under section 25A or having an agreement with the Board under section 25, or any branch or agency of a foreign bank (as defined in section 1(b) of the International Banking Act of 1978).3 Section 19 also provides that the Board may prescribe regulations concerning the payment of earnings to the depository institutions that maintain balances or on whose behalf balances are maintained, and the responsibilities of depository institutions, Federal Home Loan Banks, and the National Credit Union Administration Central Liquidity Facility with respect to the crediting and distribution of earnings attributable 1 12 CFR 204.5(a)(1). 19(b)(1)(A) defines ‘‘depository institution’’ as any insured bank as defined in section 3 of the Federal Deposit Insurance Act or any bank which is eligible to make application to become an insured bank under section 5 of such Act; any mutual savings bank as defined in section 3 of the Federal Deposit Insurance Act or any bank which is eligible to make application to become an insured bank under section 5 of such Act; any savings bank as defined in section 3 of the Federal Deposit Insurance Act or any bank which is eligible to make application to become an insured bank under section 5 of such Act; any insured credit union as defined in section 101 of the Federal Credit Union Act or any credit union which is an eligible to make application to become an insured credit union pursuant to section 201 of such Act; any member as defined in section 2 of the Federal Home Loan Bank Act; and any savings association (as defined in section 3 of the Federal Deposit Insurance Act) which is an insured depository institution (as defined in such Act) or is eligible to apply to become an insured depository institution under the Federal Deposit Insurance Act. See 12 U.S.C. 461(b)(1)(A). 3 Federal Reserve Act section 19(b)(12)(C), 12 U.S.C. 461(b)(12)(C), see 12 CFR 204.2(y) (definition of ‘‘eligible institution’’). 2 Section PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 to balances maintained in a Federal Reserve bank by any such entity on behalf of depository institutions.4 Regulation D currently requires Reserve Banks to pay interest on balances up to the top of the penaltyfree band at a rate of 1⁄4 percent, and on excess balances at a rate of 1⁄4 percent.5 Regulation D defines ‘‘top of the penalty-free band’’ to mean an amount equal to an institution’s reserve balance requirement plus an amount that is the greater of 10 percent of the institution’s reserve balance requirement or $50,000.6 Regulation D defines ‘‘excess balances’’ to mean the average balance maintained in an account at a Federal Reserve Bank by or on behalf of an institution over a reserve maintenance period (‘‘maintenance period’’) that exceeds the top of the penalty-free band.7 As such, the balances on which interest is currently payable under Regulation D are balances that are defined as maintenance period average balances. Currently, interest on balances up to the top of the penalty-free band and on excess balances of eligible institutions at Reserve Banks is, in each case, calculated by multiplying the average applicable interest rate over the maintenance period by the amount that the institution maintains, on average, over the maintenance period. If the rate of interest on excess balances were to change at a time other than at the beginning of a maintenance period, the interest on excess balances would be the average interest rate for excess balances over the maintenance period multiplied by the average excess balances maintained over the maintenance period. For example, if the interest rate on excess balances were to increase in the middle of a maintenance period from 25 basis points (1⁄4 percent) to 50 basis points (1⁄2 percent), the interest on excess balances for that maintenance period would be the average excess balances maintained over the maintenance period multiplied by the average excess balance rate, i.e., 37.5 basis points. As a result, the full effect of the increase in the excess balance rate 4 See Federal Reserve Act section 19(b)(12), 12 U.S.C. 461(b)(12). 5 See § 204.10(b)(1) and (2) of Regulation D, 12 CFR 204.10(b)(1) and (2). 6 See § 204.2(gg) of Regulation D, 12 CFR 204.2(gg). 7 See § 204.2(z) of Regulation D, 12 CFR 204.2(z). E:\FR\FM\16APP1.SGM 16APP1 Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / Proposed Rules to 50 basis points may not show through to market rates until some number of days following the announcement of the new rate. II. Summary of Proposal tkelley on DSK3SPTVN1PROD with PROPOSALS In General The Board proposes to amend Regulation D to permit interest payments on certain balances to be based on a daily rate rather than on a maintenance period average rate. The proposed amendments would define an ‘‘IORR 8 rate’’ and calculate interest on balances maintained up to the top of the penalty-free band as the average IORR rate over a maintenance period multiplied by the average balances maintained up to the top of the penaltyfree band over the maintenance period. The proposed amendments would also define an ‘‘IOER 9 rate’’ and, for institutions that maintain balances in excess of the top of the penalty-free band on average over the maintenance period, would calculate interest as daily total balances multiplied by the daily IOER rate, reduced by an adjustment to avoid double payment of interest on balances up to the top of the penaltyfree band. The proposed amendments would therefore facilitate the calculation of interest paid at the IOER rate on a daily basis applied to a daily balance, while preserving the calculation of interest paid at the IORR rate as a maintenance period average rate applied to a maintenance period average balance. The proposed amendments should allow the full effect of an increase in the IOER rate to show through to the daily level of short-term market rates when an IOER rate change does not coincide with the beginning of a maintenance period. The proposed amendments would make other changes to Regulation D to conform certain provisions to current practices as well as to improve organization and make other clarifications. Currently, § 204.10(b)(3) of Regulation D provides for payment of interest on term deposits at any other rate or rates as determined by the Board from time to time, not to exceed the general level of short term interest rates. The proposed amendments would reflect current practices for term deposit 8 I.e., ‘‘interest on required reserves.’’ ‘‘Required reserves’’ is a term that historically referred to the amount that an institution must maintain on average over a maintenance period to satisfy its reserve balance requirement. Because Regulation D currently provides for a penalty-free band around an institution’s reserve balance requirement, an institution’s balances up to the top of the penaltyfree band is the current equivalent of what was previously meant by ‘‘required reserves.’’ 9 I.e., ‘‘interest on excess reserves.’’ VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 offerings by providing that interest on term deposits is either the amount equal to the principal amount of the term deposit multiplied by a rate specified in advance, or multiplied by the rate determined by a term deposit auction. The proposed amendments would also make a conforming change to current § 204.10(d), governing ‘‘excess balance accounts,’’ 10 to provide for interest on such balances to be paid at the IOER rate. The proposed amendments would make other changes to improve the organization of the section, including placing provisions generally applicable to payments of interest together into one section (proposed § 204.10(a)). The proposed amendments would also add a new provision to proposed § 204.10(a) specifying that the amount of a balance maintained in a Reserve Bank account is determined at the close of the Reserve Bank’s business day. This provision would eliminate potential confusion over which balance (e.g., intra-day balance or end-of-day balance) would be used as the basis for the calculation of interest. Finally, the proposed amendments would delete the provision currently in § 204.10(b) of Regulation D providing that interest rates are as determined by the Board from time to time. The Board proposes to announce future changes to the IORR rate or the IOER rate, or to the mechanisms for calculating the interest on term deposits, through amendments to Regulation D. The proposed amendments would add § 204.10(f) to Regulation D, providing that generally no public comment will be sought on future changes to such rates or mechanisms, and that the effective date of such future changes will generally not be delayed. Following the detailed description of the proposal below are numerical examples illustrating the key features of the proposed amendments in cases when the IORR and IOER rates change in the middle of the reserve maintenance period. Detailed Description of Proposal 1. Proposed Calculation of Interest Currently, the amount of interest payable on balances maintained at a Reserve Bank by or on behalf of an eligible institution is equal to the sum of IORR and IOER. IORR is currently 10 An excess balance account as an account at a Reserve Bank that is established by one or more eligible institutions through an agent and in which only excess balances of the participating eligible institutions may at any time be maintained. An excess balance account is not a pass-through account for purposes of this part.’’ See Regulation D 12 CFR 204.2(aa). PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 20449 calculated as the arithmetic average of the daily IORR rates in effect over a maintenance period multiplied by the average level of balances up to the top of the penalty-free band maintained over that maintenance period. IOER is currently calculated as the arithmetic average of the daily IOER rate in effect over a maintenance period multiplied by the institution’s average level of excess balances maintained over that maintenance period. As discussed above, the current methodology for calculating IOER implies that an increase in the IOER rate may not immediately show through fully to short-term market rates in cases when an IOER rate change does not coincide with the beginning of a maintenance period. To address this issue, for institutions that maintain balances on average over the maintenance period in excess of the top of the penalty-free band, the proposed amendments to Regulation D would implement the IOER rate by multiplying the IOER rate in effect each day of the maintenance period by the institution’s total balances that day, less an adjustment to avoid the double payment of interest on balances maintained up to the top of the penalty-free band. The proposed amendments would make no changes to the calculation of IORR under the current provisions of Regulation D—that is, IORR would continue to be implemented by multiplying the average IORR rate over the maintenance period by the average level of balances up to the top of the penalty-free band maintained over the maintenance period. The implementation of IOER as set forth in the proposed amendments—that is, calculating IOER based on the daily IOER rate rather than the average of the daily rates—should support the implementation of monetary policy in cases when changes in policy rates are implemented in the middle of a maintenance period. For example, under the proposed amendments, if the Board raised the IOER rate from 25 basis points to 50 basis points in the middle of a maintenance period, eligible institutions would likely base their asset-liability management decisions on the effective IOER rate of 50 basis points for the remainder of that maintenance period. 2. Addressing a Special Case: A Floor on Interest Payments for Institutions That Maintain Balances on Average Over a Maintenance Period in Excess of the Top of the Penalty-Free Band Under the proposed amendments, an institution’s daily pattern of balances maintained over the maintenance period E:\FR\FM\16APP1.SGM 16APP1 20450 Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / Proposed Rules penalty-free band on average over the maintenance period. Including the interest payment floor in the proposed amendments for these institutions means that any institution that maintained balances in excess of the top of the penalty-free band on average over the maintenance period, but maintained balances each day of the period in a manner that would cause the special case above to apply, would be assured that it would receive interest payments no lower than the interest payments it would have received if it had maintained balances up to the top of the penalty-free band on average over the maintenance period. At present and for the foreseeable future, the proposed floor is one that likely will have little practical significance for most institutions or for federal funds market activity. Given the very large quantities of excess balances currently in the banking system, the Board believes that there are very few institutions for which this special case would be relevant. Nonetheless, the inclusion of the interest payment floor in the proposed amendments avoids penalizing an institution that maintained positive excess balances on average over a maintenance period, but nevertheless would receive less in interest under the proposed methodology than it would if it had maintained balances up to the top of the penalty-free band. Where: 14 = the number of days in a reserve maintenance period 360 = the number of days in the year used to annualize interest Avg. IORR rate = arithmetic average of the daily IORR rates in effect over a maintenance period BMRBR = average balances maintained to satisfy a reserve balance requirement (up to the top of the penalty-free band) over a maintenance period Avg. IOER rate = arithmetic average of the daily IOER rates in effect over a maintenance period Total Balances = daily total balance held The following are examples of the application of the key features of the proposed amendments to a case where the IORR and IOER rates change in the middle of a maintenance period. Each of the examples assumes: • The top of the penalty-free band is $100,000; 3. Proposed Formulas for the Calculation of Interest and Examples The proposed methodology calculates IOER by multiplying the IOER rate in effect each day of the maintenance period by the institution’s total balances that day, less an adjustment to avoid the double payment of interest on balances maintained up to the top of the penaltyfree band. Under the proposed methodology, the formulas used in determining interest payments distinguish between two basic cases— one in which institutions maintain, on average over the maintenance period, balances in excess of the top of the penalty-free band, and a second in which the institution maintains, on average over the maintenance period, balances that are equal to or lower than the top of the penalty-free band. In the first case, the proposed methodology would result in calculating the interest on balances in an account at a Reserve Bank as follows: 11 Specifically, institutions that maintain balances that are, on average over the maintenance period, in excess of the top of the penalty-free band. VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 E:\FR\FM\16APP1.SGM 16APP1 EP16AP15.004</GPH> In the second case, the proposed methodology would result in calculating the interest as follows: EP16AP15.003</GPH> tkelley on DSK3SPTVN1PROD with PROPOSALS in a Reserve Bank account would determine its IOER. There is a special case, however, in which an institution that maintained positive excess balances on average over a maintenance period could end up receiving less in total interest payments than if it had held balances equal to the top of the penaltyfree band on average over the maintenance period. This special case would arise only in those maintenance periods in which a rate change does not coincide with the beginning of a maintenance period and the institution maintains relatively high levels of total balances in its Reserve Bank account on days when the IORR rate and the IOER rate are lower. To address this special case, the proposed amendments specify a minimum interest payment, or floor, applicable to total interest payments for any institution that maintains balances on average over the maintenance period in excess of the top of the penalty-free band. Specifically, the proposed amendments set the floor for institutions maintaining excess balances 11 at an amount that would be equal to the interest payment that the institution would have received if it had maintained balances up to the top of its Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / Proposed Rules • Balances maintained are the same for each day of the calendar week of the two-week maintenance period. Thus, the average daily balance for each week is equal to the daily amount of balances maintained; • The IORR and IOER annual rates are set at 0.36 percent in week one and at 0.72 percent in week two; and • Interest is calculated based on a 360-day year. 20451 As a baseline, Example 1 applies the current methodology for calculating IORR and IOER interest payments for an eligible institution that maintains an average daily balance of $150,000 throughout the maintenance period: EXAMPLE 1—CURRENT CALCULATION OF IORR AND IOER Week Balance 1 ................................................................................................................................. 2 ................................................................................................................................. IORR Payment ........................................................................................................... IOER Payment ........................................................................................................... 150,000 150,000 .............................. .............................. In Example 1, the institution maintains a balance of $150,000 each day of the maintenance period. IORR is calculated as the average IORR rate (annualized using a 360-day year) over the maintenance period (0.54 percent) multiplied by average balances up to the top of the penalty free band over the maintenance period ($100,000) times the number of days in the maintenance period (14), resulting in an IORR payment of $21.00. IOER is similarly calculated as the average IOER rate (annualized using a 360-day year) over the maintenance period (0.54 percent) multiplied by average excess balances IORR Rate 0.0036 0.0072 21.00 10.50 IOER Rate 0.0036 0.0072 over the maintenance period ($50,000) times the number of days in the maintenance period (14), resulting in an IOER payment of $10.50. The institution thus receives $31.50 in total interest payments for the two week maintenance period. EXAMPLE 2—PROPOSED AMENDMENTS: WEEK 1 BALANCES = WEEK 2 BALANCES Week 1 Balance 1 ................................................................................................................................. 2 ................................................................................................................................. IORR Payment ........................................................................................................... IOER Payment ........................................................................................................... 150,000 150,000 .............................. .............................. In Example 2, the institution again maintains a balance of $150,000 each day of the maintenance period, but interest payments are calculated according to Equation (1) under the proposed amendments. The calculation of IORR is the same as in Example 1: The average IORR rate over the maintenance period (0.54 percent) multiplied by average balances up to the top of the penalty free band over the maintenance period ($100,000) times the number of days in the maintenance period (14), resulting in an IORR payment of $21.00. However, the calculation of IOER is based on the application of proposed § 204.10(b)(1)(B)(i) and (ii), where the amount of IOER is equal to the IOER rate in effect each day multiplied by the total balances maintained on that day for each day of the maintenance period, reduced by the amount specified in § 204.10(b)(1)(B)(ii). The amount of the reduction prescribed by proposed § 204.10(b)(1)(B)(ii) is equal to the average IOER rate over the maintenance period multiplied by the average balance up to the top of the penalty-free band maintained over the maintenance IORR Rate 0.0036 0.0072 21.00 10.50 IEOR Rate 0.0036 0.0072 period. The proposed amendments described in Example 2 yield a total IOER payment of $10.50. Thus, the total interest payments in this case are exactly the same as in Example 1. For any institution that maintains excess balances, this is a general result: If balances are constant across all days of the maintenance period, the proposed methodology generates exactly the same interest payments as the calculation under current provisions of Regulation D. EXAMPLE 3—PROPOSED AMENDMENTS: WEEK 2 BALANCES EXCEED WEEK 1 BALANCES Balance 1 ................................................................................................................................. 2 ................................................................................................................................. IORR Payment ........................................................................................................... IOER Payment ........................................................................................................... tkelley on DSK3SPTVN1PROD with PROPOSALS Week 1 100,000 200,000 .............................. .............................. In Example 3, the eligible institution’s maintenance of excess balances during the course of the maintenance period is tilted toward Week 2, when the higher IOER rate is in effect. The calculation for IORR under the proposed amendments is unchanged from Example 1 (current methodology), VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 resulting in an IORR payment of $21.00. The calculation for IOER under the proposed amendments, however, results in an IOER payment of $14.00 calculated as follows: IOER = ($100,000 * 0.0036) * 7/360 + ($200,000 * 0.0072) * 7/360 ¥ (100,000 * 0.0054) * 14/360 [(Daily Balance Week PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 IORR Rate 0.0036 0.0072 21.00 14.00 IOER Rate 0.0036 0.0072 1 * IOER Week 1) + (Daily Balance Week 2 * IOER Week 2) ¥ (Avg. Required Reserve Balance * Average IOER rate)]. IOER is higher under the proposed amendments as shown in Example 3 ($14.00) than under the current provisions of Regulation D as shown in E:\FR\FM\16APP1.SGM 16APP1 20452 Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / Proposed Rules Example 1 ($10.50). This illustrates a key feature of the proposed amendments: when an IOER rate change occurs in the middle of a maintenance period, eligible institutions immediately begin receiving interest on balances in excess of the penalty-free band at the new IOER rate. In Example 3, the eligible institution begins earning the higher IOER rate of 0.72 percent as soon as the higher IOER rate becomes effective in the middle of the maintenance period. In contrast, as shown in Example 1, the effective IOER rate on balances in excess of the penalty-free band under the current provisions of Regulation D is 0.54 percent—the average of the IOER rates in weeks 1 and 2. In Example 1, the full effect of the increase in IOER to 72 basis points would not be reflected in interest payments until the beginning of a new maintenance period. EXAMPLE 4—ROLE OF THE FLOOR ON INTEREST PAYMENTS IN PROPOSED METHODOLOGY Week 1 Balance 1 ................................................................................................................................. 2 ................................................................................................................................. IORR Payment ........................................................................................................... IOER Payment ........................................................................................................... Memo: IOER Payment (without Floor) ...................................................................... 130,000 80,000 .............................. .............................. .............................. In Examples 2 and 3, the provision in the proposed amendments for a floor on interest payments did not come into play. In Example 4, the institution’s average total balances over the period are $105,000 (implying only $5,000 in excess), and the institution ends up holding higher balances during the first week of the maintenance period when the IOER rate is lower. As shown in the Example 4 table above, the institution maintains $130,000 in the first week of the maintenance period and $80,000 in the second week of the maintenance period. Calculating IOER under the proposed amendments would result in a ‘‘pre-floor’’ interest payment on excess balances of ¥$0.69. The negative ‘‘interest payment’’ results from the end of period adjustment factor in proposed § 204.10(b)(1)(B)(ii). That adjustment factor is equal to the average IOER rate over the maintenance period multiplied by the average balance up to the top of the penalty-free band maintained over the maintenance period. Since the institution held the majority of its balances that would receive the daily IOER rate when the daily IOER rate was below the average IOER rate, the adjustment factor in proposed § 204.10(b)(1)(B)(ii) was greater than the IORR Rate 0.0036 0.0072 21.00 0.00 ¥0.69 IOER Rate 0.0036 0.0072 interest attributable to balances over the top of the penalty-free band in proposed § 204.10(b)(1)(B)(i). With the inclusion in the proposed amendments of the interest payment floor, however, the interest payment on excess balances is revised upwards to 0 and the eligible institution’s total interest payment is $21.00—the same as the interest payments the institution would have earned had it held balances on average exactly equal to the top of the penaltyfree band ($100,000) over the maintenance period. EXAMPLE 5—BALANCES EQUAL TO OR LOWER THAN TOP OF PENALTY-FREE BAND Balance 1 ................................................................................................................................. 2 ................................................................................................................................. IORR Payment ........................................................................................................... IOER Payment ........................................................................................................... tkelley on DSK3SPTVN1PROD with PROPOSALS Week 1 90,000 106,000 .............................. .............................. The first four examples involve eligible institutions that maintained balances, on average over the maintenance period, in excess of the top of their penalty-free bands. Example 5 involves an eligible institution that maintained balances on average over the maintenance period equal to $98,000, slightly lower than the top of the penalty-free band. Under the proposed amendments, the interest calculation method for institutions that hold average balances over the maintenance period equal to or lower than the top of the penalty-free band would not change from the current practice. For these institutions, interest would be calculated by taking the average IORR rate over the maintenance period (0.54 percent) multiplied by average balances up to the top of the penalty free band over the maintenance period ($98,000) VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 times the number of days in the maintenance period (14), resulting in an IORR payment of $20.58. The institution does not hold balances above the top of the penalty-free band and thus would not receive an IOER payment nor would it benefit from holding larger balances on days when the higher IOER rate was in effect. III. Section by Section Analysis Section 204.10(a) General The Board proposes to amend § 204.10(a) to incorporate certain provisions of current § 204.10(b) and to add a new provision describing the amount of a ‘‘balance’’ in an account at a Reserve Bank for purposes of the section. Proposed § 204.10(a)(1) incorporates part of current § 204.10(b)(3) into current § 204.10(a) and provides that, PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 IORR Rate 0.0036 0.0072 20.58 0.00 IOER Rate 0.0036 0.0072 .............................. .............................. except as provided in § 204.10(c), interest on balances maintained at Reserve Banks by or on behalf of an eligible institution is established by the Board in accordance with this section, at a rate or rates not to exceed the general level of short-term interest rates. Proposed § 204.10(a)(2) adds a new provision to Regulation D specifying that the amount of a ‘‘balance’’ in an account at a Reserve Bank for purposes of § 204.10 is determined at the close of the Reserve Bank’s business day. Proposed § 204.10(a)(3) moves the definition of ‘‘short-term interest rates’’ from current § 204.10(b)(3) into proposed § 204.10(a)(3). Proposed § 204.10(a)(4) moves the provision in current § 204.10(a) regarding other terms and conditions for interest payments as the Board may prescribe into proposed § 204.10(a)(4). E:\FR\FM\16APP1.SGM 16APP1 Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / Proposed Rules Section 204.10(b) Payment of interest Proposed § 204.10(b) relates to payments of interest on balances at Reserve Banks: excess balances, balances up to the top of the penaltyfree band, and term deposits. Proposed § 204.10(b)(1) and (2) set forth the amount of interest to be paid on balances of institutions that, on average over the maintenance period, maintain balances in excess of the top of the penalty-free band. These two paragraphs provide for interest at the IORR rate, interest at the IOER rate, the adjustment to interest at the IOER rate, and the minimum interest amount. Proposed § 204.10(b)(3) provides that interest for institutions that, on average over the maintenance period, maintain balances that are equal to or lower than the top of the penalty-free band is the average IORR rate over the maintenance period multiplied by the average balances maintained over the maintenance period. Proposed § 204.10(b)(4) provides for interest on term deposits. New § 204.10(b)(4)(A) provides for interest on term deposits at a rate specified in advance by the Board, in light of existing short-term market rates, to maintain the federal funds rate at a level consistent with monetary policy objectives. Section 204.10(b)(4)(B) provides for interest on term deposits at a rate determined by the auction through which such term deposits are offered. Proposed § 204.10(b)(5) specifies the IORR rate used in proposed § 204.10(b)(1) and (3), and the IOER rate used in proposed § 204.10(b)(1)(B)(i) and (ii). tkelley on DSK3SPTVN1PROD with PROPOSALS Section 204.10(c) Pass-Through Balances Proposed § 204.10(c) sets forth the language of current § 204.10(c), with one change. In the second sentence of proposed § 204.10(c), the word ‘‘shall’’ is changed to ‘‘may’’ to conform the paragraph with the provisions of § 204.10(b). Section 204.10(d) Excess Balance Accounts Proposed § 204.10(d)(5) revises current § 204.10(d)(5) by specifying that interest on excess balance accounts is the amount equal to the IOER rate in effect each day multiplied by the total balances maintained on that day for each day of the maintenance period. Section 204.10(f) Procedure for Determination of Rates Proposed § 204.10(f) sets forth a provision not previously appearing in Regulation D governing the procedure VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 for determination of rates. Specifically, proposed § 204.10(f) provides that the Board anticipates that it generally will not seek advance notice, public comment, or delayed effective dates with respect to changes in the rates of interest set forth in § 204.10. Proposed § 204.10(f) also specifies the reasons that the Board generally expects to apply in such cases. IV. Form of Comment Letters Comment letters should refer to Docket No. R–1513 and, when possible, should use a standard typeface with a font size of 10 or 12; this will enable the Board to convert text submitted in paper form to machine-readable form through electronic scanning, and will facilitate automated retrieval of comments for review. Comments may be mailed electronically to regs.comments@federalreserve.gov. V. Solicitation of Comments Regarding Use of ‘‘Plain Language’’ Section 722 of the Gramm-LeachBliley Act of 1999 requires the Board to use ‘‘plain language’’ in all proposed and final rules published after January 1, 2000. The Board invites comments on whether the proposed rule is clearly stated and effectively organized, and how the Board might make the proposed text easier to understand. VI. Initial Regulatory Flexibility Analysis In accordance with Section 3(a) of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601, et seq.), the Board has reviewed the proposed amendments to Regulation D. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period. 1. Statement of the objectives of the proposal. The Board is proposing to amend Regulation D in order to facilitate the conduct of monetary policy. Section 19 of the Act was enacted to impose reserve requirements on certain deposits and other liabilities of depository institutions for monetary policy purposes. The Board proposes to amend Regulation D to facilitate the transmission of monetary policy through the rates of interest paid on balances of eligible institutions at Reserve Banks. Specifically, the Board proposes to amend Regulation D to permit interest payments on certain balances to be based on a daily rate rather than on a maintenance period average rate. The proposed amendments should help to enhance the role of such rates of interest in moving the federal PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 20453 funds rate into the target range established by the FOMC. 2. Small entities affected by the proposal. The proposal would affect all eligible institutions that maintain balances to satisfy reserve balance requirements or excess balances at a Reserve Bank. The Board estimates that there are currently approximately 8,725 eligible institutions that maintain such balances. The Board estimates that approximately 6,950 of these institutions could be considered small entities with assets of $550 million or less. 3. Other federal rules. The Board believes that no federal rules duplicate, overlap, or conflict with the proposed amendments. 4. Significant alternatives to the proposed amendments. The proposed amendments do not impose any burden on depository institutions of any size. The proposed amendments relate to payment of earnings on balances of eligible institutions and do not provide for any new or additional reporting or other obligations. VI. Paperwork Reduction Act In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the proposed rule under the authority delegated to the Board by the Office of Management and Budget (OMB). The proposed rule contains no requirements subject to the PRA. List of Subjects in 12 CFR Parts 204 Banks, Banking, Reporting and recordkeeping requirements. Authority and Issuance For the reasons set forth in the preamble, the Board proposes to amend 12 CFR part 204 as follows: PART 204—RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D) 1. The authority citation for part 204 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 3105. 2. Section 204.10 is amended by revising paragraphs (a), (b), (c), and (d)(5), and adding paragraph (f) to read as follows: ■ § 204.10 Payment of interest on balances. (a) General. (1) Except as provided in paragraph (c) of this section, interest on balances maintained at Federal Reserve Banks by or on behalf of an eligible institution shall be established by the Board in accordance with this section, E:\FR\FM\16APP1.SGM 16APP1 20454 Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / Proposed Rules (b)(1) through (4) of this section. The rates for IORR and IOER are set forth in paragraph (b)(5) of this section. (1) For institutions that maintain balances that are, on average over the maintenance period, in excess of the top of the penalty-free band, interest is: (A) The amount equal to the average IORR rate over the maintenance period multiplied by the average balance up to the top of the penalty-free band maintained over the maintenance period; plus (B)(i) The amount equal to the IOER rate in effect each day multiplied by the total balances maintained on that day for each day of the maintenance period; minus (ii) The amount equal to the average IOER rate over the maintenance period multiplied by the average balance up to the top of the penalty-free band maintained over the maintenance period. (2) The interest amount under paragraph (b)(1) of this section shall not be less than an amount equal to the amount specified in paragraph (b)(1)(A) of this section. (3) For institutions that maintain balances that are, on average over the maintenance period, equal to or lower than the top of the penalty-free band, interest is the amount equal to the average IORR rate over the maintenance period multiplied by the average balance maintained over the maintenance period. (4) For term deposits, interest is: (A) The amount equal to the principal amount of the term deposit multiplied by a rate specified in advance by the Board, in light of existing short-term market rates, to maintain the federal funds rate at a level consistent with monetary policy objectives; or (B) The amount equal to the principal amount of the term deposit multiplied by a rate determined by the auction through which such term deposits are offered. (5) The rates for IORR and IOER are: Rate at a rate or rates not to exceed the general level of short-term interest rates. (2) For purposes of this section, the amount of a ‘‘balance’’ in an account maintained by or on behalf of an eligible institution at a Federal Reserve Bank is determined at the close of the Federal Reserve Bank’s business day. (3) For purposes of this section, ‘‘short-term interest rates’’ are rates on obligations with maturities of no more than one year, such as the primary credit rate and rates on term federal funds, term repurchase agreements, commercial paper, term Eurodollar deposits, and other similar instruments. (4) The payment of interest on balances under this section shall be subject to such other terms and conditions as the Board may prescribe. (b) Payment of interest. Interest on balances maintained at Federal Reserve Banks by or on behalf of an eligible institution is established as set forth in paragraphs Effective tkelley on DSK3SPTVN1PROD with PROPOSALS IORR .................................................................. IOER .................................................................. 14 (c) Pass-through balances. A passthrough correspondent that is an eligible institution may pass back to its respondent interest paid on balances maintained to satisfy a reserve balance requirement of that respondent. In the case of balances maintained by a passthrough correspondent that is not an eligible institution, a Reserve Bank may pay interest only on the balances maintained to satisfy a reserve balance requirement of one or more respondents up to the top of the penalty-free band, and the correspondent shall pass back to its respondents interest paid on balances in the correspondent’s account. (d) * * * * * * * * (5) Interest on balances of eligible institutions maintained in an excess balance account is the amount equal to the IOER rate in effect each day multiplied by the total balances maintained on that day for each day of the maintenance period. * * * * * (f) Procedure for determination of rates. The Board anticipates that notice and public participation with respect to changes in the rate or rates of interest to be paid under this section will generally be impracticable, unnecessary, contrary to the public interest, or otherwise not required in the public interest, and that there will generally be reason and good cause in the public interest why the effective date should not be deferred for 30 days. The reason or reasons in such cases are generally expected to include that such notice, public participation, or deferment of effective date would prevent the action from becoming effective as promptly as necessary in the public interest, would permit speculators or others to reap unfair profits or to interfere with the Board’s actions taken with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country, would provoke other consequences contrary to the public interest, would not aid the persons affected, or would otherwise serve no useful purpose. VerDate Sep<11>2014 16:35 Apr 15, 2015 Jkt 235001 ⁄ percent. ⁄ percent. 14 By order of the Board of Governors of the Federal Reserve System, April 13, 2015. Michael Lewandowski, Associate Secretary of the Board. [FR Doc. 2015–08743 Filed 4–15–15; 8:45 am] BILLING CODE 6210–01–P PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–143040–14] RIN 1545–BM59 Reporting for Premium; Basis Reporting by Securities Brokers and Basis Determination for Debt Instruments and Options; Correction Internal Revenue Service (IRS), Treasury. ACTION: Correction to a notice of proposed rulemaking by cross-reference to temporary regulations. AGENCY: This document contains corrections to a notice of proposed rulemaking by cross-reference to temporary regulations (REG–143040–14) that was published in the Federal Register on Friday, March 13, 2015 (80 FR 13292). The IRS is issuing temporary regulations relating to information reporting by brokers for transactions involving debt instruments and options. DATES: Written or electronic comments and requests for a public hearing for the notice of proposed rulemaking by crossreference to temporary regulations published at 80 FR 13292, March 13, SUMMARY: E:\FR\FM\16APP1.SGM 16APP1

Agencies

[Federal Register Volume 80, Number 73 (Thursday, April 16, 2015)]
[Proposed Rules]
[Pages 20448-20454]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-08743]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 80, No. 73 / Thursday, April 16, 2015 / 
Proposed Rules

[[Page 20448]]



FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Docket No. R-1513]
RIN 7100-AE31


Regulation D: Reserve Requirements for Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking; request for public comment.

-----------------------------------------------------------------------

SUMMARY: The Board is requesting comment on proposed amendments to 
Regulation D (Reserve Requirements of Depository Institutions) 
regarding the payment of interest on certain balances maintained at 
Federal Reserve Banks by or on behalf of eligible institutions. 
Specifically, the Board proposes to amend Regulation D to permit 
interest payments on certain balances to be based on a daily rate 
rather than on a maintenance period average rate. The proposed 
amendments should help to enhance the role of such rates of interest in 
moving the federal funds rate into the target range established by the 
FOMC, particularly on occasions when changes in those rates do not 
coincide with the beginning of a maintenance period.

DATES: Comments must be received by May 18, 2015.

FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Special Counsel 
(202/452-3565), Legal Division, or Thomas R. Keating, Financial Analyst 
(202/973-7401), or Jeffrey W. Huther, Senior Economist (202/452-3139), 
Division of Monetary Affairs; for users of Telecommunications Device 
for the Deaf (TDD) only, contact 202/263-4869; Board of Governors of 
the Federal Reserve System, 20th and C Streets NW., Washington, DC 
20551.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    For monetary policy purposes, section 19 of the Federal Reserve Act 
(``the Act'') imposes reserve requirements on certain types of deposits 
and other liabilities of depository institutions. Regulation D, which 
implements section 19 of the Act, requires that a depository 
institution meet reserve requirements by holding cash in its vault, or 
if vault cash is insufficient, in the form of a balance in an account 
at a Federal Reserve Bank (``Reserve Bank'').\1\ Section 19 also 
provides that balances maintained by or on behalf of certain 
institutions in an account at a Reserve Bank may receive earnings to be 
paid by the Reserve Bank at least once each quarter, at a rate or rates 
not to exceed the general level of short-term interest rates. 
Institutions that are eligible to receive earnings on their balances 
held at Reserve Banks (``eligible institutions'') include the 
institutions described in section 19(b)(1)(A) of the Act \2\ and any 
trust company, corporation organized under section 25A or having an 
agreement with the Board under section 25, or any branch or agency of a 
foreign bank (as defined in section 1(b) of the International Banking 
Act of 1978).\3\ Section 19 also provides that the Board may prescribe 
regulations concerning the payment of earnings to the depository 
institutions that maintain balances or on whose behalf balances are 
maintained, and the responsibilities of depository institutions, 
Federal Home Loan Banks, and the National Credit Union Administration 
Central Liquidity Facility with respect to the crediting and 
distribution of earnings attributable to balances maintained in a 
Federal Reserve bank by any such entity on behalf of depository 
institutions.\4\
    Regulation D currently requires Reserve Banks to pay interest on 
balances up to the top of the penalty-free band at a rate of \1/4\ 
percent, and on excess balances at a rate of \1/4\ percent.\5\ 
Regulation D defines ``top of the penalty-free band'' to mean an amount 
equal to an institution's reserve balance requirement plus an amount 
that is the greater of 10 percent of the institution's reserve balance 
requirement or $50,000.\6\ Regulation D defines ``excess balances'' to 
mean the average balance maintained in an account at a Federal Reserve 
Bank by or on behalf of an institution over a reserve maintenance 
period (``maintenance period'') that exceeds the top of the penalty-
free band.\7\ As such, the balances on which interest is currently 
payable under Regulation D are balances that are defined as maintenance 
period average balances.
---------------------------------------------------------------------------

    \1\ 12 CFR 204.5(a)(1).
    \2\ Section 19(b)(1)(A) defines ``depository institution'' as 
any insured bank as defined in section 3 of the Federal Deposit 
Insurance Act or any bank which is eligible to make application to 
become an insured bank under section 5 of such Act; any mutual 
savings bank as defined in section 3 of the Federal Deposit 
Insurance Act or any bank which is eligible to make application to 
become an insured bank under section 5 of such Act; any savings bank 
as defined in section 3 of the Federal Deposit Insurance Act or any 
bank which is eligible to make application to become an insured bank 
under section 5 of such Act; any insured credit union as defined in 
section 101 of the Federal Credit Union Act or any credit union 
which is an eligible to make application to become an insured credit 
union pursuant to section 201 of such Act; any member as defined in 
section 2 of the Federal Home Loan Bank Act; and any savings 
association (as defined in section 3 of the Federal Deposit 
Insurance Act) which is an insured depository institution (as 
defined in such Act) or is eligible to apply to become an insured 
depository institution under the Federal Deposit Insurance Act. See 
12 U.S.C. 461(b)(1)(A).
    \3\ Federal Reserve Act section 19(b)(12)(C), 12 U.S.C. 
461(b)(12)(C), see 12 CFR 204.2(y) (definition of ``eligible 
institution'').
    \4\ See Federal Reserve Act section 19(b)(12), 12 U.S.C. 
461(b)(12).
    \5\ See Sec.  204.10(b)(1) and (2) of Regulation D, 12 CFR 
204.10(b)(1) and (2).
    \6\ See Sec.  204.2(gg) of Regulation D, 12 CFR 204.2(gg).
    \7\ See Sec.  204.2(z) of Regulation D, 12 CFR 204.2(z).
---------------------------------------------------------------------------

    Currently, interest on balances up to the top of the penalty-free 
band and on excess balances of eligible institutions at Reserve Banks 
is, in each case, calculated by multiplying the average applicable 
interest rate over the maintenance period by the amount that the 
institution maintains, on average, over the maintenance period. If the 
rate of interest on excess balances were to change at a time other than 
at the beginning of a maintenance period, the interest on excess 
balances would be the average interest rate for excess balances over 
the maintenance period multiplied by the average excess balances 
maintained over the maintenance period. For example, if the interest 
rate on excess balances were to increase in the middle of a maintenance 
period from 25 basis points (\1/4\ percent) to 50 basis points (\1/2\ 
percent), the interest on excess balances for that maintenance period 
would be the average excess balances maintained over the maintenance 
period multiplied by the average excess balance rate, i.e., 37.5 basis 
points. As a result, the full effect of the increase in the excess 
balance rate

[[Page 20449]]

to 50 basis points may not show through to market rates until some 
number of days following the announcement of the new rate.

II. Summary of Proposal

In General

    The Board proposes to amend Regulation D to permit interest 
payments on certain balances to be based on a daily rate rather than on 
a maintenance period average rate. The proposed amendments would define 
an ``IORR \8\ rate'' and calculate interest on balances maintained up 
to the top of the penalty-free band as the average IORR rate over a 
maintenance period multiplied by the average balances maintained up to 
the top of the penalty-free band over the maintenance period. The 
proposed amendments would also define an ``IOER \9\ rate'' and, for 
institutions that maintain balances in excess of the top of the 
penalty-free band on average over the maintenance period, would 
calculate interest as daily total balances multiplied by the daily IOER 
rate, reduced by an adjustment to avoid double payment of interest on 
balances up to the top of the penalty-free band. The proposed 
amendments would therefore facilitate the calculation of interest paid 
at the IOER rate on a daily basis applied to a daily balance, while 
preserving the calculation of interest paid at the IORR rate as a 
maintenance period average rate applied to a maintenance period average 
balance. The proposed amendments should allow the full effect of an 
increase in the IOER rate to show through to the daily level of short-
term market rates when an IOER rate change does not coincide with the 
beginning of a maintenance period.
---------------------------------------------------------------------------

    \8\ I.e., ``interest on required reserves.'' ``Required 
reserves'' is a term that historically referred to the amount that 
an institution must maintain on average over a maintenance period to 
satisfy its reserve balance requirement. Because Regulation D 
currently provides for a penalty-free band around an institution's 
reserve balance requirement, an institution's balances up to the top 
of the penalty-free band is the current equivalent of what was 
previously meant by ``required reserves.''
    \9\ I.e., ``interest on excess reserves.''
---------------------------------------------------------------------------

    The proposed amendments would make other changes to Regulation D to 
conform certain provisions to current practices as well as to improve 
organization and make other clarifications. Currently, Sec.  
204.10(b)(3) of Regulation D provides for payment of interest on term 
deposits at any other rate or rates as determined by the Board from 
time to time, not to exceed the general level of short term interest 
rates. The proposed amendments would reflect current practices for term 
deposit offerings by providing that interest on term deposits is either 
the amount equal to the principal amount of the term deposit multiplied 
by a rate specified in advance, or multiplied by the rate determined by 
a term deposit auction. The proposed amendments would also make a 
conforming change to current Sec.  204.10(d), governing ``excess 
balance accounts,'' \10\ to provide for interest on such balances to be 
paid at the IOER rate.
---------------------------------------------------------------------------

    \10\ An excess balance account as an account at a Reserve Bank 
that is established by one or more eligible institutions through an 
agent and in which only excess balances of the participating 
eligible institutions may at any time be maintained. An excess 
balance account is not a pass-through account for purposes of this 
part.'' See Regulation D 12 CFR 204.2(aa).
---------------------------------------------------------------------------

    The proposed amendments would make other changes to improve the 
organization of the section, including placing provisions generally 
applicable to payments of interest together into one section (proposed 
Sec.  204.10(a)). The proposed amendments would also add a new 
provision to proposed Sec.  204.10(a) specifying that the amount of a 
balance maintained in a Reserve Bank account is determined at the close 
of the Reserve Bank's business day. This provision would eliminate 
potential confusion over which balance (e.g., intra-day balance or end-
of-day balance) would be used as the basis for the calculation of 
interest.
    Finally, the proposed amendments would delete the provision 
currently in Sec.  204.10(b) of Regulation D providing that interest 
rates are as determined by the Board from time to time. The Board 
proposes to announce future changes to the IORR rate or the IOER rate, 
or to the mechanisms for calculating the interest on term deposits, 
through amendments to Regulation D. The proposed amendments would add 
Sec.  204.10(f) to Regulation D, providing that generally no public 
comment will be sought on future changes to such rates or mechanisms, 
and that the effective date of such future changes will generally not 
be delayed.
    Following the detailed description of the proposal below are 
numerical examples illustrating the key features of the proposed 
amendments in cases when the IORR and IOER rates change in the middle 
of the reserve maintenance period.

Detailed Description of Proposal

1. Proposed Calculation of Interest
    Currently, the amount of interest payable on balances maintained at 
a Reserve Bank by or on behalf of an eligible institution is equal to 
the sum of IORR and IOER. IORR is currently calculated as the 
arithmetic average of the daily IORR rates in effect over a maintenance 
period multiplied by the average level of balances up to the top of the 
penalty-free band maintained over that maintenance period. IOER is 
currently calculated as the arithmetic average of the daily IOER rate 
in effect over a maintenance period multiplied by the institution's 
average level of excess balances maintained over that maintenance 
period.
    As discussed above, the current methodology for calculating IOER 
implies that an increase in the IOER rate may not immediately show 
through fully to short-term market rates in cases when an IOER rate 
change does not coincide with the beginning of a maintenance period. To 
address this issue, for institutions that maintain balances on average 
over the maintenance period in excess of the top of the penalty-free 
band, the proposed amendments to Regulation D would implement the IOER 
rate by multiplying the IOER rate in effect each day of the maintenance 
period by the institution's total balances that day, less an adjustment 
to avoid the double payment of interest on balances maintained up to 
the top of the penalty-free band. The proposed amendments would make no 
changes to the calculation of IORR under the current provisions of 
Regulation D--that is, IORR would continue to be implemented by 
multiplying the average IORR rate over the maintenance period by the 
average level of balances up to the top of the penalty-free band 
maintained over the maintenance period.
    The implementation of IOER as set forth in the proposed 
amendments--that is, calculating IOER based on the daily IOER rate 
rather than the average of the daily rates--should support the 
implementation of monetary policy in cases when changes in policy rates 
are implemented in the middle of a maintenance period. For example, 
under the proposed amendments, if the Board raised the IOER rate from 
25 basis points to 50 basis points in the middle of a maintenance 
period, eligible institutions would likely base their asset-liability 
management decisions on the effective IOER rate of 50 basis points for 
the remainder of that maintenance period.
2. Addressing a Special Case: A Floor on Interest Payments for 
Institutions That Maintain Balances on Average Over a Maintenance 
Period in Excess of the Top of the Penalty-Free Band
    Under the proposed amendments, an institution's daily pattern of 
balances maintained over the maintenance period

[[Page 20450]]

in a Reserve Bank account would determine its IOER. There is a special 
case, however, in which an institution that maintained positive excess 
balances on average over a maintenance period could end up receiving 
less in total interest payments than if it had held balances equal to 
the top of the penalty-free band on average over the maintenance 
period. This special case would arise only in those maintenance periods 
in which a rate change does not coincide with the beginning of a 
maintenance period and the institution maintains relatively high levels 
of total balances in its Reserve Bank account on days when the IORR 
rate and the IOER rate are lower.
    To address this special case, the proposed amendments specify a 
minimum interest payment, or floor, applicable to total interest 
payments for any institution that maintains balances on average over 
the maintenance period in excess of the top of the penalty-free band. 
Specifically, the proposed amendments set the floor for institutions 
maintaining excess balances \11\ at an amount that would be equal to 
the interest payment that the institution would have received if it had 
maintained balances up to the top of its penalty-free band on average 
over the maintenance period. Including the interest payment floor in 
the proposed amendments for these institutions means that any 
institution that maintained balances in excess of the top of the 
penalty-free band on average over the maintenance period, but 
maintained balances each day of the period in a manner that would cause 
the special case above to apply, would be assured that it would receive 
interest payments no lower than the interest payments it would have 
received if it had maintained balances up to the top of the penalty-
free band on average over the maintenance period.
---------------------------------------------------------------------------

    \11\ Specifically, institutions that maintain balances that are, 
on average over the maintenance period, in excess of the top of the 
penalty-free band.
---------------------------------------------------------------------------

    At present and for the foreseeable future, the proposed floor is 
one that likely will have little practical significance for most 
institutions or for federal funds market activity. Given the very large 
quantities of excess balances currently in the banking system, the 
Board believes that there are very few institutions for which this 
special case would be relevant. Nonetheless, the inclusion of the 
interest payment floor in the proposed amendments avoids penalizing an 
institution that maintained positive excess balances on average over a 
maintenance period, but nevertheless would receive less in interest 
under the proposed methodology than it would if it had maintained 
balances up to the top of the penalty-free band.
3. Proposed Formulas for the Calculation of Interest and Examples
    The proposed methodology calculates IOER by multiplying the IOER 
rate in effect each day of the maintenance period by the institution's 
total balances that day, less an adjustment to avoid the double payment 
of interest on balances maintained up to the top of the penalty-free 
band. Under the proposed methodology, the formulas used in determining 
interest payments distinguish between two basic cases--one in which 
institutions maintain, on average over the maintenance period, balances 
in excess of the top of the penalty-free band, and a second in which 
the institution maintains, on average over the maintenance period, 
balances that are equal to or lower than the top of the penalty-free 
band. In the first case, the proposed methodology would result in 
calculating the interest on balances in an account at a Reserve Bank as 
follows:
[GRAPHIC] [TIFF OMITTED] TP16AP15.003

Where:


14 = the number of days in a reserve maintenance period
360 = the number of days in the year used to annualize interest
Avg. IORR rate = arithmetic average of the daily IORR rates in 
effect over a maintenance period
BMRBR = average balances maintained to satisfy a reserve balance 
requirement (up to the top of the penalty-free band) over a 
maintenance period
Avg. IOER rate = arithmetic average of the daily IOER rates in 
effect over a maintenance period
Total Balances = daily total balance held

    In the second case, the proposed methodology would result in 
calculating the interest as follows:
[GRAPHIC] [TIFF OMITTED] TP16AP15.004

    The following are examples of the application of the key features 
of the proposed amendments to a case where the IORR and IOER rates 
change in the middle of a maintenance period. Each of the examples 
assumes:
     The top of the penalty-free band is $100,000;

[[Page 20451]]

     Balances maintained are the same for each day of the 
calendar week of the two-week maintenance period. Thus, the average 
daily balance for each week is equal to the daily amount of balances 
maintained;
     The IORR and IOER annual rates are set at 0.36 percent in 
week one and at 0.72 percent in week two; and
     Interest is calculated based on a 360-day year.
    As a baseline, Example 1 applies the current methodology for 
calculating IORR and IOER interest payments for an eligible institution 
that maintains an average daily balance of $150,000 throughout the 
maintenance period:

                                 Example 1--Current Calculation of IORR and IOER
----------------------------------------------------------------------------------------------------------------
                          Week                                Balance           IORR Rate          IOER Rate
----------------------------------------------------------------------------------------------------------------
1......................................................            150,000             0.0036             0.0036
2......................................................            150,000             0.0072             0.0072
IORR Payment...........................................  .................              21.00
IOER Payment...........................................  .................              10.50
----------------------------------------------------------------------------------------------------------------

    In Example 1, the institution maintains a balance of $150,000 each 
day of the maintenance period. IORR is calculated as the average IORR 
rate (annualized using a 360-day year) over the maintenance period 
(0.54 percent) multiplied by average balances up to the top of the 
penalty free band over the maintenance period ($100,000) times the 
number of days in the maintenance period (14), resulting in an IORR 
payment of $21.00. IOER is similarly calculated as the average IOER 
rate (annualized using a 360-day year) over the maintenance period 
(0.54 percent) multiplied by average excess balances over the 
maintenance period ($50,000) times the number of days in the 
maintenance period (14), resulting in an IOER payment of $10.50. The 
institution thus receives $31.50 in total interest payments for the two 
week maintenance period.

                        Example 2--Proposed Amendments: Week 1 Balances = Week 2 Balances
----------------------------------------------------------------------------------------------------------------
                         Week 1                               Balance           IORR Rate          IEOR Rate
----------------------------------------------------------------------------------------------------------------
1......................................................            150,000             0.0036             0.0036
2......................................................            150,000             0.0072             0.0072
IORR Payment...........................................  .................              21.00
IOER Payment...........................................  .................              10.50
----------------------------------------------------------------------------------------------------------------

    In Example 2, the institution again maintains a balance of $150,000 
each day of the maintenance period, but interest payments are 
calculated according to Equation (1) under the proposed amendments. The 
calculation of IORR is the same as in Example 1: The average IORR rate 
over the maintenance period (0.54 percent) multiplied by average 
balances up to the top of the penalty free band over the maintenance 
period ($100,000) times the number of days in the maintenance period 
(14), resulting in an IORR payment of $21.00. However, the calculation 
of IOER is based on the application of proposed Sec.  
204.10(b)(1)(B)(i) and (ii), where the amount of IOER is equal to the 
IOER rate in effect each day multiplied by the total balances 
maintained on that day for each day of the maintenance period, reduced 
by the amount specified in Sec.  204.10(b)(1)(B)(ii). The amount of the 
reduction prescribed by proposed Sec.  204.10(b)(1)(B)(ii) is equal to 
the average IOER rate over the maintenance period multiplied by the 
average balance up to the top of the penalty-free band maintained over 
the maintenance period. The proposed amendments described in Example 2 
yield a total IOER payment of $10.50. Thus, the total interest payments 
in this case are exactly the same as in Example 1. For any institution 
that maintains excess balances, this is a general result: If balances 
are constant across all days of the maintenance period, the proposed 
methodology generates exactly the same interest payments as the 
calculation under current provisions of Regulation D.

                     Example 3--Proposed Amendments: Week 2 Balances Exceed Week 1 Balances
----------------------------------------------------------------------------------------------------------------
                         Week 1                               Balance           IORR Rate          IOER Rate
----------------------------------------------------------------------------------------------------------------
1......................................................            100,000             0.0036             0.0036
2......................................................            200,000             0.0072             0.0072
IORR Payment...........................................  .................              21.00
IOER Payment...........................................  .................              14.00
----------------------------------------------------------------------------------------------------------------

    In Example 3, the eligible institution's maintenance of excess 
balances during the course of the maintenance period is tilted toward 
Week 2, when the higher IOER rate is in effect. The calculation for 
IORR under the proposed amendments is unchanged from Example 1 (current 
methodology), resulting in an IORR payment of $21.00. The calculation 
for IOER under the proposed amendments, however, results in an IOER 
payment of $14.00 calculated as follows:
    IOER = ($100,000 * 0.0036) * 7/360 + ($200,000 * 0.0072) * 7/360 - 
(100,000 * 0.0054) * 14/360 [(Daily Balance Week 1 * IOER Week 1) + 
(Daily Balance Week 2 * IOER Week 2) - (Avg. Required Reserve Balance * 
Average IOER rate)].
    IOER is higher under the proposed amendments as shown in Example 3 
($14.00) than under the current provisions of Regulation D as shown in

[[Page 20452]]

Example 1 ($10.50). This illustrates a key feature of the proposed 
amendments: when an IOER rate change occurs in the middle of a 
maintenance period, eligible institutions immediately begin receiving 
interest on balances in excess of the penalty-free band at the new IOER 
rate. In Example 3, the eligible institution begins earning the higher 
IOER rate of 0.72 percent as soon as the higher IOER rate becomes 
effective in the middle of the maintenance period. In contrast, as 
shown in Example 1, the effective IOER rate on balances in excess of 
the penalty-free band under the current provisions of Regulation D is 
0.54 percent--the average of the IOER rates in weeks 1 and 2. In 
Example 1, the full effect of the increase in IOER to 72 basis points 
would not be reflected in interest payments until the beginning of a 
new maintenance period.

                    Example 4--Role of the Floor on Interest Payments in Proposed Methodology
----------------------------------------------------------------------------------------------------------------
                         Week 1                               Balance           IORR Rate          IOER Rate
----------------------------------------------------------------------------------------------------------------
1......................................................            130,000             0.0036             0.0036
2......................................................             80,000             0.0072             0.0072
IORR Payment...........................................  .................              21.00
IOER Payment...........................................  .................               0.00
Memo: IOER Payment (without Floor).....................  .................              -0.69
----------------------------------------------------------------------------------------------------------------

    In Examples 2 and 3, the provision in the proposed amendments for a 
floor on interest payments did not come into play. In Example 4, the 
institution's average total balances over the period are $105,000 
(implying only $5,000 in excess), and the institution ends up holding 
higher balances during the first week of the maintenance period when 
the IOER rate is lower. As shown in the Example 4 table above, the 
institution maintains $130,000 in the first week of the maintenance 
period and $80,000 in the second week of the maintenance period. 
Calculating IOER under the proposed amendments would result in a ``pre-
floor'' interest payment on excess balances of -$0.69. The negative 
``interest payment'' results from the end of period adjustment factor 
in proposed Sec.  204.10(b)(1)(B)(ii). That adjustment factor is equal 
to the average IOER rate over the maintenance period multiplied by the 
average balance up to the top of the penalty-free band maintained over 
the maintenance period. Since the institution held the majority of its 
balances that would receive the daily IOER rate when the daily IOER 
rate was below the average IOER rate, the adjustment factor in proposed 
Sec.  204.10(b)(1)(B)(ii) was greater than the interest attributable to 
balances over the top of the penalty-free band in proposed Sec.  
204.10(b)(1)(B)(i). With the inclusion in the proposed amendments of 
the interest payment floor, however, the interest payment on excess 
balances is revised upwards to 0 and the eligible institution's total 
interest payment is $21.00--the same as the interest payments the 
institution would have earned had it held balances on average exactly 
equal to the top of the penalty-free band ($100,000) over the 
maintenance period.

                       Example 5--Balances Equal to or Lower Than Top of Penalty-Free Band
----------------------------------------------------------------------------------------------------------------
                         Week 1                               Balance           IORR Rate          IOER Rate
----------------------------------------------------------------------------------------------------------------
1......................................................             90,000             0.0036             0.0036
2......................................................            106,000             0.0072             0.0072
IORR Payment...........................................  .................              20.58  .................
IOER Payment...........................................  .................               0.00  .................
----------------------------------------------------------------------------------------------------------------

    The first four examples involve eligible institutions that 
maintained balances, on average over the maintenance period, in excess 
of the top of their penalty-free bands. Example 5 involves an eligible 
institution that maintained balances on average over the maintenance 
period equal to $98,000, slightly lower than the top of the penalty-
free band. Under the proposed amendments, the interest calculation 
method for institutions that hold average balances over the maintenance 
period equal to or lower than the top of the penalty-free band would 
not change from the current practice. For these institutions, interest 
would be calculated by taking the average IORR rate over the 
maintenance period (0.54 percent) multiplied by average balances up to 
the top of the penalty free band over the maintenance period ($98,000) 
times the number of days in the maintenance period (14), resulting in 
an IORR payment of $20.58. The institution does not hold balances above 
the top of the penalty-free band and thus would not receive an IOER 
payment nor would it benefit from holding larger balances on days when 
the higher IOER rate was in effect.

III. Section by Section Analysis

Section 204.10(a) General

    The Board proposes to amend Sec.  204.10(a) to incorporate certain 
provisions of current Sec.  204.10(b) and to add a new provision 
describing the amount of a ``balance'' in an account at a Reserve Bank 
for purposes of the section.
    Proposed Sec.  204.10(a)(1) incorporates part of current Sec.  
204.10(b)(3) into current Sec.  204.10(a) and provides that, except as 
provided in Sec.  204.10(c), interest on balances maintained at Reserve 
Banks by or on behalf of an eligible institution is established by the 
Board in accordance with this section, at a rate or rates not to exceed 
the general level of short-term interest rates.
    Proposed Sec.  204.10(a)(2) adds a new provision to Regulation D 
specifying that the amount of a ``balance'' in an account at a Reserve 
Bank for purposes of Sec.  204.10 is determined at the close of the 
Reserve Bank's business day.
    Proposed Sec.  204.10(a)(3) moves the definition of ``short-term 
interest rates'' from current Sec.  204.10(b)(3) into proposed Sec.  
204.10(a)(3).
    Proposed Sec.  204.10(a)(4) moves the provision in current Sec.  
204.10(a) regarding other terms and conditions for interest payments as 
the Board may prescribe into proposed Sec.  204.10(a)(4).

[[Page 20453]]

Section 204.10(b) Payment of interest

    Proposed Sec.  204.10(b) relates to payments of interest on 
balances at Reserve Banks: excess balances, balances up to the top of 
the penalty-free band, and term deposits.
    Proposed Sec.  204.10(b)(1) and (2) set forth the amount of 
interest to be paid on balances of institutions that, on average over 
the maintenance period, maintain balances in excess of the top of the 
penalty-free band. These two paragraphs provide for interest at the 
IORR rate, interest at the IOER rate, the adjustment to interest at the 
IOER rate, and the minimum interest amount.
    Proposed Sec.  204.10(b)(3) provides that interest for institutions 
that, on average over the maintenance period, maintain balances that 
are equal to or lower than the top of the penalty-free band is the 
average IORR rate over the maintenance period multiplied by the average 
balances maintained over the maintenance period.
    Proposed Sec.  204.10(b)(4) provides for interest on term deposits. 
New Sec.  204.10(b)(4)(A) provides for interest on term deposits at a 
rate specified in advance by the Board, in light of existing short-term 
market rates, to maintain the federal funds rate at a level consistent 
with monetary policy objectives. Section 204.10(b)(4)(B) provides for 
interest on term deposits at a rate determined by the auction through 
which such term deposits are offered.
    Proposed Sec.  204.10(b)(5) specifies the IORR rate used in 
proposed Sec.  204.10(b)(1) and (3), and the IOER rate used in proposed 
Sec.  204.10(b)(1)(B)(i) and (ii).

Section 204.10(c) Pass-Through Balances

    Proposed Sec.  204.10(c) sets forth the language of current Sec.  
204.10(c), with one change. In the second sentence of proposed Sec.  
204.10(c), the word ``shall'' is changed to ``may'' to conform the 
paragraph with the provisions of Sec.  204.10(b).

Section 204.10(d) Excess Balance Accounts

    Proposed Sec.  204.10(d)(5) revises current Sec.  204.10(d)(5) by 
specifying that interest on excess balance accounts is the amount equal 
to the IOER rate in effect each day multiplied by the total balances 
maintained on that day for each day of the maintenance period.

Section 204.10(f) Procedure for Determination of Rates

    Proposed Sec.  204.10(f) sets forth a provision not previously 
appearing in Regulation D governing the procedure for determination of 
rates. Specifically, proposed Sec.  204.10(f) provides that the Board 
anticipates that it generally will not seek advance notice, public 
comment, or delayed effective dates with respect to changes in the 
rates of interest set forth in Sec.  204.10. Proposed Sec.  204.10(f) 
also specifies the reasons that the Board generally expects to apply in 
such cases.

IV. Form of Comment Letters

    Comment letters should refer to Docket No. R-1513 and, when 
possible, should use a standard typeface with a font size of 10 or 12; 
this will enable the Board to convert text submitted in paper form to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Comments may be mailed 
electronically to regs.comments@federalreserve.gov.

V. Solicitation of Comments Regarding Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the 
Board to use ``plain language'' in all proposed and final rules 
published after January 1, 2000. The Board invites comments on whether 
the proposed rule is clearly stated and effectively organized, and how 
the Board might make the proposed text easier to understand.

VI. Initial Regulatory Flexibility Analysis

    In accordance with Section 3(a) of the Regulatory Flexibility Act 
(RFA) (5 U.S.C. 601, et seq.), the Board has reviewed the proposed 
amendments to Regulation D. A final regulatory flexibility analysis 
will be conducted after consideration of comments received during the 
public comment period.
    1. Statement of the objectives of the proposal. The Board is 
proposing to amend Regulation D in order to facilitate the conduct of 
monetary policy. Section 19 of the Act was enacted to impose reserve 
requirements on certain deposits and other liabilities of depository 
institutions for monetary policy purposes. The Board proposes to amend 
Regulation D to facilitate the transmission of monetary policy through 
the rates of interest paid on balances of eligible institutions at 
Reserve Banks. Specifically, the Board proposes to amend Regulation D 
to permit interest payments on certain balances to be based on a daily 
rate rather than on a maintenance period average rate. The proposed 
amendments should help to enhance the role of such rates of interest in 
moving the federal funds rate into the target range established by the 
FOMC.
    2. Small entities affected by the proposal. The proposal would 
affect all eligible institutions that maintain balances to satisfy 
reserve balance requirements or excess balances at a Reserve Bank. The 
Board estimates that there are currently approximately 8,725 eligible 
institutions that maintain such balances. The Board estimates that 
approximately 6,950 of these institutions could be considered small 
entities with assets of $550 million or less.
    3. Other federal rules. The Board believes that no federal rules 
duplicate, overlap, or conflict with the proposed amendments.
    4. Significant alternatives to the proposed amendments. The 
proposed amendments do not impose any burden on depository institutions 
of any size. The proposed amendments relate to payment of earnings on 
balances of eligible institutions and do not provide for any new or 
additional reporting or other obligations.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The proposed rule contains no 
requirements subject to the PRA.

List of Subjects in 12 CFR Parts 204

    Banks, Banking, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 204 as follows:

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 
(REGULATION D)

0
1. The authority citation for part 204 continues to read as follows:

    Authority:  12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
3105.

0
2. Section 204.10 is amended by revising paragraphs (a), (b), (c), and 
(d)(5), and adding paragraph (f) to read as follows:


Sec.  204.10  Payment of interest on balances.

    (a) General. (1) Except as provided in paragraph (c) of this 
section, interest on balances maintained at Federal Reserve Banks by or 
on behalf of an eligible institution shall be established by the Board 
in accordance with this section,

[[Page 20454]]

at a rate or rates not to exceed the general level of short-term 
interest rates.
    (2) For purposes of this section, the amount of a ``balance'' in an 
account maintained by or on behalf of an eligible institution at a 
Federal Reserve Bank is determined at the close of the Federal Reserve 
Bank's business day.
    (3) For purposes of this section, ``short-term interest rates'' are 
rates on obligations with maturities of no more than one year, such as 
the primary credit rate and rates on term federal funds, term 
repurchase agreements, commercial paper, term Eurodollar deposits, and 
other similar instruments.
    (4) The payment of interest on balances under this section shall be 
subject to such other terms and conditions as the Board may prescribe.
    (b) Payment of interest. Interest on balances maintained at Federal 
Reserve Banks by or on behalf of an eligible institution is established 
as set forth in paragraphs
    (b)(1) through (4) of this section. The rates for IORR and IOER are 
set forth in paragraph (b)(5) of this section.
    (1) For institutions that maintain balances that are, on average 
over the maintenance period, in excess of the top of the penalty-free 
band, interest is:
    (A) The amount equal to the average IORR rate over the maintenance 
period multiplied by the average balance up to the top of the penalty-
free band maintained over the maintenance period; plus
    (B)(i) The amount equal to the IOER rate in effect each day 
multiplied by the total balances maintained on that day for each day of 
the maintenance period; minus
    (ii) The amount equal to the average IOER rate over the maintenance 
period multiplied by the average balance up to the top of the penalty-
free band maintained over the maintenance period.
    (2) The interest amount under paragraph (b)(1) of this section 
shall not be less than an amount equal to the amount specified in 
paragraph (b)(1)(A) of this section.
    (3) For institutions that maintain balances that are, on average 
over the maintenance period, equal to or lower than the top of the 
penalty-free band, interest is the amount equal to the average IORR 
rate over the maintenance period multiplied by the average balance 
maintained over the maintenance period.
    (4) For term deposits, interest is:
    (A) The amount equal to the principal amount of the term deposit 
multiplied by a rate specified in advance by the Board, in light of 
existing short-term market rates, to maintain the federal funds rate at 
a level consistent with monetary policy objectives; or
    (B) The amount equal to the principal amount of the term deposit 
multiplied by a rate determined by the auction through which such term 
deposits are offered.
    (5) The rates for IORR and IOER are:

------------------------------------------------------------------------
                                         Rate              Effective
------------------------------------------------------------------------
IORR............................  \1/4\ percent.....
IOER............................  \1/4\ percent.....
------------------------------------------------------------------------

    (c) Pass-through balances. A pass-through correspondent that is an 
eligible institution may pass back to its respondent interest paid on 
balances maintained to satisfy a reserve balance requirement of that 
respondent. In the case of balances maintained by a pass-through 
correspondent that is not an eligible institution, a Reserve Bank may 
pay interest only on the balances maintained to satisfy a reserve 
balance requirement of one or more respondents up to the top of the 
penalty-free band, and the correspondent shall pass back to its 
respondents interest paid on balances in the correspondent's account.
    (d) * * *
* * * * *
    (5) Interest on balances of eligible institutions maintained in an 
excess balance account is the amount equal to the IOER rate in effect 
each day multiplied by the total balances maintained on that day for 
each day of the maintenance period.
* * * * *
    (f) Procedure for determination of rates. The Board anticipates 
that notice and public participation with respect to changes in the 
rate or rates of interest to be paid under this section will generally 
be impracticable, unnecessary, contrary to the public interest, or 
otherwise not required in the public interest, and that there will 
generally be reason and good cause in the public interest why the 
effective date should not be deferred for 30 days. The reason or 
reasons in such cases are generally expected to include that such 
notice, public participation, or deferment of effective date would 
prevent the action from becoming effective as promptly as necessary in 
the public interest, would permit speculators or others to reap unfair 
profits or to interfere with the Board's actions taken with a view to 
accommodating commerce and business and with regard to their bearing 
upon the general credit situation of the country, would provoke other 
consequences contrary to the public interest, would not aid the persons 
affected, or would otherwise serve no useful purpose.

    By order of the Board of Governors of the Federal Reserve 
System, April 13, 2015.
Michael Lewandowski,
Associate Secretary of the Board.
[FR Doc. 2015-08743 Filed 4-15-15; 8:45 am]
 BILLING CODE 6210-01-P